The new mortgage stress test that was implemented in the beginning of 2018 has definitely thrown a wrench into the works. Or has it? What effects is the OFSI Mortgage Stress Test really having? I’ll do my best here to get the mortgage stress test explained for you.

So lets first answer why it was implemented. Canada and Ontario has an issue and it was getting bigger. Household debt was on the rise and with the steady increase in both the everyday debt, increasing housing costs and interest rates many Canadians were getting themselves into tighter spots. A big issue was by purchasing homes that they wouldn’t be able to maintain as interest rates inched higher little by little. Money was almost free a few years ago which many Canadians rightfully took advantage of.

A little math…….You bought a home for $400,000.00 in 2014 and had a variable interest rate of 2.57% for 5 years and you put 5% down or $20,000. Your monthly mortgage payment when based on 25 years was then about $1785. Your renewal is now due in 2019 and you still have about $335,000 owing on your home, if you stay on schedule and renew for 20 years (25 original minus the 5 you’ve already paid) and you get todays average rate your payment jumps to about $1988 per month. More monthly debt you are now going to have to account for. Can you afford the extra $200 per month?
 

SO WHAT WAS DONE ABOUT IT?

In January of 2016 the OFSI or the Office of the Superintendent of Financial Institutions, who is an independent agency of the government which reports to the Minister of Finance, proposed some changes. One of these changes was a mandatory mortgage stress test for people who are having their mortgages go through federally regulated lenders, such as Scotiabank, TD etcetera. The first proposal was for high ratio mortgages (less than a 20% down payment) but as of January 1st, 2018 it will apply to all applicants or people looking to borrow money or switching their current lenders which are federally regulated institutions must be subjected to the “mortgage stress test”.

WHAT DOES THIS MEAN?

It is pretty well what it sounds like. You are subjected to a stress to see what the outcome is. Your mortgage stress test will predict an outcome of a heavier debt load by increased payments brought on by increased interest rates etcetera. So, all potential homeowners will now need to show they can handle payments based on a minimum qualifying rate. For federally regulated lenders, this means the Bank of Canada’s current five-year benchmark rate or it could also be based on their mortgage contract rate meaning the rate they’ve been received from their lender plus 2%.

I think examples or scenarios are much better for educating ourselves so let’s consider this…

Jane and John have decent jobs with a combined income of $120,000 and they’ve saved for quite some time or took advantage of ***assistance**** programs and have $50,000 to put towards a downpayment on their first home. They’ve figured that they’ll have to come up with about $475 to pay the heating bill and property tax.

Using the rate which they received from their lender of 3.39% Jane and John could afford a home costing $720,567 based on a 25 year mortgage. However now using the qualifying rate which here we’ll say is the +2% or 5.39% the most they would be allowed to purchase would be $597,865.
 

CAN YOU AVOID THE MORTGAGE STRESS TEST?

The opportunity to avoid the OFSI mortgage stress test is possible. Using private lenders, which are financial lending institutions that don’t take their funding from federally regulated lenders is an option. As an example credit unions are provincially regulated. Many would be homeowners have turned to these lending institutions when they haven’t qualified at “traditional” banks. A caveat to this is some private lenders do charge higher interest rates than those of traditional lenders and they have begun to use this as well as other ways of narrowing the prospective clients they will deal with. A great way to decide which route is best for you is to speak with a qualified mortgage broker.

If you have any questions about the mortgage stress test or any of the other real estate questions please feel free to reach out, we’re always here to help or put you in touch with one of our qualified professionals.